Aurelia Butler

For decades, the economics consensus has been that fiscal and monetary policy should be largely separate. Governments should provide public services, foster an acceptable distribution of resources and ensure the sustainability of their public finances. Central banks should then set interest rates to maintain price stability. It is a neat and tidy model. The principle of separation between fiscal and monetary policy always had an important exception, of course, which is triggered in a serious economic downturn. When interest rates fall so low that monetary policy becomes ineffective, central banks need the power of fiscal stimulus to prevent a depression. The global financial crisis of 2008-09 and the initial Covid crisis of 2020 showed these were not mere theoretical possibilities. That thinking feels very passé. Now that interest rates in most advanced economies have risen towards normal levels, calls for governments to act in concert with central banks are louder than ever. In the past three months, the IMF, the OECD and the Bank for International Settlements have each demanded countries raise taxes or limit public spending to curtail demand and reduce inflationary pressures, thereby helping monetary policy to do its job. The economic logic is compelling. Fiscal policy can be powerful and rapid in bringing demand down to meet the reduced supply capacity wrought by the Covid pandemic and the energy crisis. Higher taxes allow governments to spread the burden of interest rate rises more widely — rather than watching those with the highest debts pay the largest price. Getting governments involved in price stability is therefore more effective and fairer. The BIS last month picked up on an additional benefit of tighter fiscal and looser monetary policy: the current scenario, it said, was testing the boundaries of “the region of stability”, with high interest rates making a financial crisis much more likely. Last year’s turmoil in UK pension funds and this year’s among US regional and Swiss banks was a warning of what might arise if governments did not step up to the plate, it added. So far, so clear. Governments should help their central banks by borrowing less at a time of high inflationary pressure. But as the IMF acknowledged last week, it’s not quite that simple. In an important paper at the European Central Bank’s annual forum, fund staff presented evidence that the substantial energy subsidies implemented across Europe last year appear to have both lowered peak rates of headline inflation and kept future price rises closer to the ECB’s 2 per cent target. The research results directly contradicted the IMF’s own advice; it was brave of its chief economist, Pierre-Olivier Gourinchas, to present the findings himself. Having studied the experience of energy subsidies, the fund now believes that their direct effect in bringing down headline inflation and taking the heat out of a European wage price spiral outweighs the fiscal stimulus involved in capping petrol, gas and electricity prices.Gourinchas was clear that this was a specific result caused by slack in eurozone labour markets, rather than marking the IMF’s conversion to the benefits of price controls or subsidies. He added that the jury was out on the inflationary effects of the UK’s energy price subsidies because the labour market there was so tight. Regardless of the precise estimates, the important thing to note is that we are living in a new, much messier era. Governments clearly have a role in managing inflation — in a slump, this means stimulus; when inflation is high, it means higher taxes or austerity, and very occasionally price-distorting subsidies. Central banks are still ultimately in control of inflation with monetary policy but the idea that governments can pass the buck is past its sell-by [email protected] More

A top official at the US central bank has called on the Federal Reserve to immediately resume raising interest rates after forgoing an increase last month, citing scant evidence that inflationary pressures are easing as needed.Lorie Logan, president of the Dallas Fed and a voting member this year on the Federal Open Market Committee, disclosed on Thursday that she was among the officials who thought a quarter-point interest rate rise at the June meeting was “entirely appropriate” in light of strong incoming data as she laid out the case for the central bank to further squeeze the US economy.At the most recent meeting, officials unanimously supported a pause in the Fed’s historic monetary tightening campaign after 10 consecutive interest rate rises, but signalled that half a percentage point more worth of increases would be necessary in order to damp demand sufficiently.In prepared remarks delivered at a Central Bank Research Association event, Logan said it was “important” for the Fed to “follow through” given her concerns about “whether inflation will return to target in a sustainable and timely way” amid what she described as “clearly pretty hot” data.“If we lose ground in our effort to restore price stability, we will need to do more later to catch up,” she warned.Logan expressed scepticism that the bulk of the impact of the Fed’s previous rate increases has yet to filter through the economy, instead arguing that “we have already had a fair amount of time to see the overall effects of monetary tightening”. The central bank has raised the federal funds rate more than 5 percentage points since early 2022.One concern is that the housing market has “bottomed out”, Logan said, and if recent signs of improvement gather momentum, it could pose “upside risk to inflation down the road”.

Logan also pushed back on the idea that the banking stress that erupted earlier this year was having an outsized effect on credit availability across the economy.Officials, including chair Jay Powell, have cited these factors as reasons why the Fed should move more gradually at this stage in terms of further interest rate increases, although he recently conceded that “consecutive” moves should not be ruled out.Speaking on Wednesday, John Williams, president of the New York Fed and a close ally of Powell, said a June pause was the right decision but acknowledged that there was “more to do” with regard to interest rate rises. More

A surge in orders for cars and other vehicles boosted German manufacturers in May, but analysts warn that the sector remains under pressure from slowing domestic and global demand. Manufacturing orders in the eurozone’s largest economy were up 6.4 per cent in May from a month earlier, data by the national statistics office Destatis showed on Thursday. The expansion was stronger than the 1.2 per cent forecast by economists polled by Reuters.Growth in orders the previous month was also revised up to a 0.2 per cent expansion from preliminary estimates of a 0.4 per cent contraction and follows a 10.9 per cent plunge in March. Orders for new cars were up 8.6 per cent in May.Christian Fuertjes, economist at HSBC, said that “today’s strong upside surprise was merely some kind of normalisation from an exceptionally weak level rather than a genuine turn of the tides with respect to the overall demand situation”. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the result was “solid” but driven by one-off items, with vehicle orders for ships and trains rising by 137 per cent.In contrast, orders for electrical equipment and consumer goods declined 15 per cent and 0.8 per cent respectively compared with April.Vistesen expects new orders to decline 1.5 to 2 per cent in the three months to June compared with the previous quarter. In the less volatile three-month comparison, incoming orders from March to May were 6.1 per cent lower than in the previous period. Monthly orders were also 4.3 per cent below the levels in May last year.Strong demand for military equipment to boost Ukraine’s defence against Russian forces was also boosting orders, Fuertjes noted. However, he expects higher interest rates combined with still low real wages, as well as continued challenges in the transition from combustion engines to electric vehicles, to weigh on car production in the months ahead. “The demand situation for the German industrial sector as a whole remains challenging,” he said.German gross domestic product has contracted for the last two consecutive quarters, with output falling below the level in the first quarter of 2019.In June, economists polled by Consensus Economics expected the German economy to contract 0.2 per cent this year, a downward revision from the marginal expansion forecast in the previous month.Mateusz Urban, economist at Oxford Economics, has trimmed growth expectations for Germany this year. With “demand dragged down by a tightening of monetary policy — especially in the US”, he now expected industrial output in the eurozone’s biggest economy to keep shrinking until the first quarter of 2024. More

NEW YORK (Reuters) – Federal Reserve Bank of Dallas President Lorie Logan said Thursday that there was a case for a rate rise at the June policy meeting, in comments that affirmed her view that more rate increases will be needed to cool off a still strong economy. “It would have been entirely appropriate to raise the federal funds target range at the (Federal Open Market Committee)’s June meeting, consistent with the data we had seen in recent months and the Fed’s dual-mandate goals,” Logan said. But noting “a challenging and uncertain environment,” Logan said “it can make sense to skip a meeting and move more gradually.”Logan noted that forecasts released at the June FOMC meeting showed an expectation of more increases, and said “it is important for the FOMC to follow through on the signal we sent in June,” adding “two-thirds of FOMC participants projected at least two more rate increases this year.” “I remain very concerned about whether inflation will return to target in a sustainable and timely way,” Logan said, adding “the continuing outlook for above-target inflation and a stronger-than-expected labor market calls for more-restrictive monetary policy,” the policymaker said. Logan’s comments came from the text of a speech prepared for delivery before a conference at Columbia University. She is a voting member of the rate-setting Federal Open Market Committee this year. Logan spoke a day after the release of minutes from the central bank’s June meeting, which offered fresh details on the Fed’s decision to hold rates steady at its policy meeting last month, pausing what had been an aggressive campaign aimed at lowering high levels of inflation. The meeting minutes showed almost all central bankers favored holding the overnight target rate fixed at between 5% and 5.25% in a bid to see how the cumulative impact of past rate increase were feeding through the economy. Officials were still worried about inflation and flagged a still strong job market, while a minority of policymakers expressed interest in raising rates at the June meeting. Forecasts from the June FOMC pointed to the possibility of a half percentage point more in rate hikes later this year and Fed officials like central bank chairman Jerome Powell have noted in recent comments the very real prospect that the tightening campaign is not done. Speaking on Wednesday, New York Fed leader John Williams also said it’s likely the Fed will have to raise rates again but he did not say if he favored a hike at the July FOMC meeting. In her speech, Logan noted that the economy, as shown by the job market and inflation, was stronger than expected in the first half of the year and added, “while labor market indicators have eased, the overall pace of rebalancing remains slower than previously expected.” Logan also cast doubt on the idea that there’s some wave of past policy action waiting to flow through the economy, saying “I’m skeptical about the potential for large additional effects from this channel.” The official also said that she’s watching commercial real estate risks but does not see them as particularly threatening. She said that the broader housing market appears to have bottomed out. Logan also said that she doesn’t see anything tied to the Fed’s balance sheet drawdown affecting the Fed’s rate choices right now, and said the Treasury’s work to rebuild its cash account is unlikely to hit bank reserves, with the cash instead drawn from the Fed’s reverse repo facility. More

UK businesses expect to raise their prices at a fast pace in the coming year in response to workers’ demands for higher wages, according to a survey by the Bank of England that reinforces concerns about high inflation.The BoE decision maker panel, a regular survey of chief financial officers at UK companies, showed that in the three months to June businesses expect output price inflation to be 5.3 per cent in the next year. This was only marginally down from the 5.4 per cent recorded in the poll in the three months to May.The new survey published on Thursday also found that chief financial officers expect workers’ wages to grow by 5.3 per cent in the coming year. That compares to growth of 5.2 per cent recorded in the previous poll. Actual wage growth reported by chief financial officers increased to 7.1 per cent in June, from 6.7 per cent in May.The BoE survey findings suggest “that optimism that wage growth is easing towards normal levels soon may be misplaced”, said George Moran, economist at Nomura. He added the wage growth showed “only a marginal rise, but the fact that it didn’t fall is significant”.Ruth Gregory, economist at Capital Economics, said: “With wage expectations of businesses remaining elevated, higher wages are becoming embedded in businesses’ future budgets.”The survey of chief financial officers is an important source of price and wage information when the central bank takes decisions on interest rates.The central bank has raised rates 13 times since late 2021 as it tries to tackle high inflation and bring it down to the BoE target of 2 per cent.After official data showed inflation remained stuck at 8.7 per cent in May, the BoE last month increased rates by a larger than expected half percentage point to 5 per cent. Rates are at their highest in 15 years.The survey provided better news on recruitment as the share of businesses saying that hiring was more difficult than usual continued to decline from a record high of about 90 per cent in the summer of last year.Despite the fall, 58 per cent of companies were still struggling to find workers in June. The survey was released as separate data showed the negative impact of rising interest rates on the construction sector, including housebuilding.The S&P Global/Cips UK construction purchasing managers’ index, a measure of sector activity, fell to 48.9 in June, from 51.6 the previous month, and the lowest level since January. Tim Moore, economics director at S&P Global Market Intelligence, which compiles the data, said “weaker housing market conditions in the wake of higher borrowing costs acted as a major constraint on UK construction output in June”. More

Corporate America has taken to laying off a large number of their workforce, as aggressive interest rate hikes by the Federal Reserve to tame inflation have besmirched the United States’ economic outlook, stoking fears of a potential recession.Despite the drop in job cuts in the month, layoffs in June were higher than the corresponding month a year earlier, the report said.Technology companies continue to lead job cut announcements with 141,516 layoffs in the first half of the year, compared with about 6,000 in the same period last year.The sector laid off nearly 5,000 employees last month, the report said.”In fact, June is historically the slowest month on average for announcements. It is also possible that the deep job losses predicted due to inflation and interest rates will not come to pass, particularly as the Fed holds rates,” said Andrew Challenger, senior vice president at the employment firm.Meta Platforms had slashed jobs in May, part of a plan announced in March to eliminate 10,000 roles.Like its peers, Amazon.com (NASDAQ:AMZN) in March had said it would axe another 9,000 roles as a part of its second retrenchment drive, as investors also persuaded the firms to cut costs.After a round of multiple rate hikes, the Fed unanimously kept its interest rates steady at the central bank’s June meeting that could freeze layoffs and allay fears of employees.”Probably we have already seen the tech sector shed the bulk of its ‘at risk’ workers, and as such I would expect further Fed tightening to now impact more heavily on other sectors of the US economy,” said Stuart Cole, chief macro economist at Equiti Capital. More